Freemium is a business model in which the owner or service provider offers basic features to users at no cost and charges a premium for supplemental or advanced features. The term, which is a combination of the words "free" and "premium," was coined by Jarid Lukin of Alacra in 2006 after venture capitalist Fred Wilson came up with the idea.
The freemium model is popular with Web 2.0 companies and Web-based e-mail services. For an enterprise to implement a freemium service, the first step is to acquire a loyal customer base. Premium features or add-ons can be offered by means of online advertising, magazine advertising, referral networks, search engine marketing and word of mouth. Services that have successfully employed the freemium model include AdAware, Flickr, Newsgator, Skype, Box.net and Webroot.
In an effective freemium service, customers find it easy to acquire the basic set of features. The premium features are typically promoted in an indirect way, avoiding "in-your-face" banners or pop-up ads. For example, an anti-spyware program can offer manual offline scanning and updates for free. If the user attempts to activate a specialized function such as continuous malware monitoring, a note appears to the effect that it is a premium feature. If the user wants to obtain that feature, the purchasing or subscription process is simple and straightforward.